What a difference a month has made in equity markets and all on the back of further conjecture on where tariffs will land! Even more interesting was the fact that the US Court of International Trade, on the 29th of May 2025, had blocked Trump’s sweeping trade tariffs citing that a spiralling US budget deficit doesn’t allow the use of “emergency powers” to implement the tariffs. For a very short moment, it was heartening to see that laws are still operational in the US and would hold Trump accountable for previous world trade agreements. Of course, the appeals court reversed this decision the very next day further emboldening Trump in making whatever changes he deems necessary!
Below is an interesting chart from the US Census Bureau illustrating tariffs in the US since 1820! What is interesting still is the increase in tariffs in 1920 whilst significant, was also coupled with an 80% reduction in immigration.
Yet, the 1920 are known as the “Roaring 20’s” as there was exponential growth in markets and economies around the world. This was driven by recovery from wartime devastation (think Ukraine and the Gaza) and deferred spending (remember Covid), a boom in construction, and the rapid growth of consumer goods such as automobiles and electricity in North America and Europe and a few other developed countries such as Australia. Is there a chance this condition will be repeated on the back of Artificial Intelligence (AI) gaining momentum in mainstream manufacturing, pharmaceutical, agriculture, productivity, etc. The pessimist in me reminds me that this decade long growth was subsequently followed by the Great Depression!
Could AI be the catalyst for continued and enhanced growth over the coming decade? No one really knows but it’s important to think longer-term (and take historical events into account) when constructing investment portfolios that will withstand the test of time and let short-term market gyrations be filtered out as just ‘noise’.
Volatility is likely to continue as markets react to negotiations on tariffs and concerns around the trade “wars” fuelling inflation leading to the potential for a recession in the US. Adding some defensive exposure, such as bonds, can provide a buffer should equity markets lose steam or momentum. Whilst this has not always been the case, generally in the long run, bonds have provided a negative correlation to equity markets in times of dislocation. In addition to this, alternate assets such as infrastructure, private markets, private debt (less attractive in recessionary environments), etc. also provide both diversification and a buffer when equity markets experience heightened volatility.
We remain concerned around the US dollar due to uncertain growth prospects and inflations worries as well as escalation of trade wars potentially negating the need to purchase the US dollar. This is evident from the surge in the price of Gold as an alternate (just one of the factors with others being purchasing by ETFs and fund managers, Jewellery manufacturers, use in technology, etc. –see chart below) with reserve banks around the world purchasing this asset. We are keeping a keen eye on currency volatility and direction from a risk mitigation perspective and looking at perhaps hedging our currency exposures in the coming months on International equity investments.
Political uncertainties at our shores are causing concerns both in Corporate Australia as well as with the high net-worth investors. The significant detraction from tax legislation by the current Treasurer, Jim Chalmers, in taxing unrealised capital gains in super funds in excess of $3M value is ruffling feathers. There is a very strong likelihood that the revenue this government has included in its budget calculations generated from this unreasonable tax is unlikely to materialise as most accounts will reduce the balance under the $3M cap. This, in turn, may potentially drive investments away from super and reduce the funding available to corporate Australia in expanding their business.
Wilson Asset Management has calculated the deadweight loss that will result from the taxing of unrealised capital gains of some superannuation funds to be $94.5 billion in lost economic efficiency.
“A tax perceived as eroding accumulated wealth, such as the proposed taxing of unrealised capital gains on super balances of over $3 million, may lead to reduced savings, increased consumption or a shift towards less taxed investment options,” Geoff Wilson said.
However, legislation on this has yet to be enacted and there is still some chance that the unrealised capital gains taxation part of the bill will be removed, despite reluctance from Jim Chalmers most recently. Therefore, whilst we have identified some options and strategies for our clients should this law come in as is, we are reticent to take action until the specific and final details are known to ensure we are not prematurely making changes that may not be beneficial in the long run. Let’s hope common sense prevails and taxing the unrealised capital gains portion of the bill is withdrawn!
Despite all the ‘noise’ both globally and locally, equity markets have resumed their upward trajectory, and Australian equities are now on par with the Dow Jones over the past 12 months. There has been a strong recovery post “liberation Day”, which is when President Trump had floated the exorbitant tariffs against their trading partners. This emphasises the importance to remain invested and not panic sell as markets can recover quickly. There has been a lot of backwards and forwards with the tariff negotiations and this is likely to continue for the foreseeable future and likely to drive equity market volatility.
Staying the course towards diversification and asset allocation principles is paramount. Taking a longer-term view but pivoting where we can mitigate risks and enhance longer-term returns is necessary in these volatile times and this is how we manage portfolios. Remember, our mandate is set by our clients’ goals and objectives, and this is what we strive towards.
As always, here are a few quotes for you to ponder over and take solace in times of uncertainty.
“Time is your friend; impulse your enemy” —John Bogle
“Successful investing is about managing risks, not avoiding it” —Benjamin Graham
And I love this one:
“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.” –– Henry Ford